“If our performance consistently outperforms the market average in the long term, that would be a great success. But even if our performance is sometimes lower than the market average, I believe that is still a success.” These were the words of Warren Buffett and his partners.
Why did Buffett say this? Although Buffett set a goal of surpassing the Dow Jones Industrial Average by 10%, he cleverly reminded his partners, 'In fact, it is wrong to expect our annual returns to be higher than the market average. We should focus more on long-term returns!' In this statement, Buffett revealed the key secret of how he would become the unparalleled stock god in the future.
However, the actual investment performance showed a completely different picture. From 1957 to 1965, during these eight years, Buffett's partnership company not only did not have a single year with performance below the Dow Jones Industrial Average but, more remarkably, the average annual performance exceeded the index by 20%!
If we quantify it, the Dow Jones Index was 11.4%, while Buffett achieved 29.8%. Even later, after the acquisition of Berkshire Hathaway, he reached a record-breaking 47.2% in 1965, an overwhelming victory compared to the Dow Jones Index.
Buffett is very serious and humorous. In his reports to the partners, he wrote, 'Having so many assets, I can't go to the movies with Susan in the afternoon, nor can I slack off at work!' Although all partners can only listen to Buffett's annual reports and have no knowledge of his actual investments, each person has immense confidence in him and gives him full authority to manage the company. Buffett's fundamental approach is based on the 'Graham-Dodd Theory,' combined with his unique thinking, to embark on bold investments!
One of the most typical examples is his investment in American Express (abbreviated as AMEX). American Express did not have significant physical assets such as factories, and according to the 'Graham-Dodd Theory,' it was not a suitable investment. However, Buffett believed that American Express's stock price had only dropped because it was involved in the fraud scandal of the Salad Oil Swindle, and he had already noticed American Express then.
The credit card industry was about to have a promising future during the transition to the cashless era. Additionally, as mass tourism to other countries gained popularity, the ticketing sector that facilitated travel started snowballing. Millions of users already used American Express at the time, giving it a substantial competitive advantage in brand recognition and franchise rights.
As Buffett later said, 'No matter how excellent a company is, there will be a time when significant problems arise, and it is precisely at those moments that great investment opportunities arise.' When American Express was declining, a tremendous investment opportunity presented itself!
Considering that this was a large-scale investment, Buffett conducted thorough research beforehand. He went to local steakhouses in Omaha and observed whether people continued to use American Express credit cards at the cash register. In addition, he frequently visited banks and travel agencies to see if there were any abnormal changes in the issuance of travel checks. Finally, he concluded, 'Customers did not stop using American Express credit cards due to the fraud incident, and they continued to use American Express travel checks.'
In 1964, the stock price of American Express fell from $65 before the scandal to $35 as a result of a frantic Wall Street sell-off of its shares. Buffett took action! He used 40% of the available funds from his partnership alliance, equivalent to $13 million, which accounted for 5% of the total shares of American Express. At that time, everyone was selling, but Buffett was buying and didn't care.
Two years later, the stock price of American Express tripled, and Buffett made a profit of $20 million. Only then did he sell the shares. If his investment judgment had been wrong, he would have lost the trust of his partners, and his investment career could have ended.
However, his decision was based on careful estimation and accompanied by bold action, perfectly validating his famous quote, “Be fearful when others are greedy and greedy when others are fearful.”
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